The dry spell that began in the fall of 2009 is hurting China's industrial sector despite its location in the primarily agricultural provinces of the southwest.

China needs to experience at least ten instances of medium to heavy rainfall to ease the current aridity of Chongqing, and the provinces of Yunnan, Guizhou, Guangxi and Sichuan. Otherwise, productivity in the export manufacturing industries and, consequently, delivery lead times will be significantly impacted.

Although production in the southwestern provinces centres on agriculture, some industrial sectors have a presence there. Yunnan, for instance, is one of the country's major manufacturers of rubber. Last year, the province turned out 302,000 tons of raw rubber, contributing nearly 39% of the nation’s annual yield. The months-long drought, however, is curtailing volume, which is projected to decrease 10 to 20% percent if the situation does not improve before June.

China already imports much of its rubber from Indonesia, Malaysia, Thailand and Vietnam. But the drought affecting the country's southwest is felt by all areas along the Mekong River, which includes Thailand and Vietnam. Demand for rubber continues to grow alongside China’s heightened tyre production. As a result, the cost of natural rubber increased to 25,000 yuan ($3,660) per ton in April, up 12% from just two months prior.

Publicly listed tyre maker Aeolus reports that rubber in the domestic and international spot markets is now 10 to 14% more expensive than it was in October 2009. Among local processors, Kunming Yun Ken Rubber Co. Ltd, which is currently turning out two-thirds less than its average yield, offers natural rubber at more than 24,000 yuan ($3,510) per ton.

There is some concern that rubber costs might soar to record highs in H2 2010 if the drought does not ease in May.

No rain, no power

The resulting shortage in electricity is one of the reasons why the drought has severely hampered rubber production. Hydropower is one of the most important sources of energy in the southwestern provinces, contributing 45 to 50% of the region’s total energy supply. The extended dry season, however, has made it difficult for hydropower stations to generate at full capacity. As such, the region is now experiencing a 25 to 30% shortfall in its required electrical output.

Apart from rubber, nonferrous metals such as copper, aluminium, zinc and tin are widely processed in Yunnan. Although the energy deficit has slowed smelting and refining, productivity in this sector has not been as severely affected.

Although copper is a major input for the manufacturing of consumer electronics, Yunnan accounts for only 9% of national output. Priority has been given to large nonferrous metal suppliers in the process of power rationing, to include producers of copper, allowing those in the nonferrous industry to yield a 64% m-o-m growth in output during March. Moreover, many of these large producers have standalone power stations.

Aluminium is a key metal as well, particularly as an input for the production of kitchenware, hardware, and in the housing for some electronics products. The drought and the resulting energy shortfall is affecting manufacturers’ ability to perform electrolysis—the energy intensive technique used to produce aluminium—thereby causing those in the industry to reduce their projections of output by 20% for the year. However, this may not be a detrimental development for China’s aluminium industry, currently experiencing an oversupply of the metal.

The effects of the power deficit have reached even the coastal provinces. Guangdong, for instance, used to acquire 30 percent of its electricity from the southwest. Now, the province supplies a portion of its power load to the interior.

The Guangdong Economic and Information Technology Commission puts the current shortfall at 3.35 million kW per day. This situation has led to a peak-shifting strategy, where high-electricity consuming industries have to carry out their operations at night. In major cities such as Guangzhou and Shenzhen, industrial parks and high-tech enterprises are guaranteed sufficient power.

However, if the drought extends through June, Guangdong’s production will inevitably be affected. Businesses that are already reeling from the effects of a labor shortage will have to contend with power outages as well, which will inevitably result in missed deadlines and delayed deliveries.

This article was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through e-magazines, trade shows and industry research.